The lender is the largest addition so far to the Paxos system. Potential for real-time settlement threatens DTCC’s dominance
Bank of America Corp. joined the network created by Paxos Trust Co. to settle stock trades in minutes rather than days by using blockchain, the latest sign of Wall Street’s growing adoption of the technology.
The second-biggest U.S. bank joins Credit Suisse Group AG and Nomura Holdings Inc.’s Instinet on the Paxos Settlement Service. In 2019, the Securities and Exchange Commission allowed Paxos to begin a pilot program for settling equity trades.
Bank of America has been conducting internal transactions for the past few months and, if approved as a clearing agency, will offer the service to clients next, said Kevin McCarthy, head of financing and clearing at the Charlotte, North Carolina-based firm.
The Paxos system is one of several areas where banks are using blockchain to reshape how they interact with markets. JPMorgan Chase & Co. has been using a version of Ethereum to execute overnight repurchase agreements since late last year, with daily transactions exceeding $1 billion. Goldman Sachs Group Inc. is preparing to join that market as well.
McCarthy said the flexibility and cost savings offered by Paxos appealed to the bank.
“We can determine the settlement cycle down to T+0,” he said, referring to a settlement that happens at the same time or on the same day as the trade. “We then can free up the collateral we’d have to post on an overnight basis,” which could lead to big savings. “The return-on-assets in this business would improve, which has been a challenge,” he said.
The move to more flexible and speedier stock settlement could pose a threat to the Depository Trust & Clearing Corp.’s half-century dominance in equity markets. Only trades logged by DTCC by 11:30 a.m. are eligible to be settled that day. That misses about 75% of all stocks traded on a given day, according to Paxos Chief Executive Officer Chad Cascarilla.
The current settlement time is about two days, during which money to sellers from buyers is stuck in the market’s plumbing.
That’s a relative eternity when trades can happen in milliseconds. The Paxos system connects investors directly using a version of the Ethereum blockchain. The DTCC is working to shorten its settlement times and offers same-day settlement for some trades.
The equity market is big enough for multiple settlement systems, said Bina Kalola, BofA’s head of global banking and markets financial technology innovation and investments.
“That flexibility and change in workflows to bilateral settlement is very interesting,” she said, noting it’s important that Paxos has a link to the DTCC and that there has been broad cooperation. “Everyone is partnering and that’s critical.”
Paxos raised $300 million from investors last month, giving it a valuation of $2.4 billion.
Pushing blockchain acceptance in banking and other industries is key for the technology to succeed, Cascarilla said.
“The way we get mainstream adoption is by having firms like Bank of America come on and feel comfortable,” he said.
Kalola said the lender is serious about exploring new ways to adopt innovation to the current market structure.
“We will go through this journey together, and the collaboration and partnerships really matter,” she said. “We will see a new way of doing things that will benefit everyone.”